Everyone is bearish on India SaaS. I’m not.

Since I invest in B2B software, I’ve spoken to a lot of people in this ecosystem - founders, VCs, operators - and there is a bearish sentiment on India SaaS. Some feel like there is no investable opportunity. Operators worry that there is no good series-B company to join. Exits are unclear because the bar is too high. Public multiples are low. There are a lot of reasons to be sceptical, but I’m still a long-term believer. I’m going to share why I feel this way:

The early hits from India - AWS was born in 2006. The next 5 years saw the birth of many cloud companies in both the US and India. They were disrupting the on-premise world with better software, delivered at a lower entry cost (opex vs. capex), and with frequent updates. This led to a lot of successes, including the likes of Freshworks, Chargebee, etc., from India. Postman also started as an open-source project in 2012. These companies were early to market and captured a lot of pent-up demand (Freshworks selling to SMBs), enabled new business models (Chargebee), or new ways of development (Postman).

1. Lacking bold ideas - Seeing some of the early successes, everyone got bullish and doubled down on SaaS. We thought it was easy. Founders thought it was easy to build; investors thought it was easy to invest. In 2020, by count, 60% of all India venture investments were in SaaS. But this cohort of companies has not converted into enough success. When B2C got bold, B2B got complacent. Most SaaS startups were playing in existing markets with established leaders, with incremental innovation instead of exponential innovation, and have not been able to break out. Many Indian venture investors are looking at this cohort of companies in their portfolios and are worried about their outcomes.
2. What worked? Early movers - I saw a stat recently that of the India SaaS companies incorporated 2016 onwards, only ~10 companies have crossed 10M ARR. These companies had one of two things driving their growth - they were early to market and category creators (Observe.AI, Acceldata, Murf AI, invideo, Atlan, Nanonets are a few), or they were in less competitive markets (Toddle, vertical SaaS for schools). Distribution innovation (or the PLG wave) did not play out in India, except for a few companies (Eg: Hasura in open-source, Quizizz in apps).
3. The public SaaS meltdown - Starting in 2022, public SaaS multiples reset from 20X all the way down to 5.2x NTM revenue today. Growth slowed down due to the great optimization. Net expansion took a tumble as IT leaders optimized spending and renegotiated contracts. The current view is that the bar for US IPOs is higher (300M TTM revenue, 50% growth), and the valuations are worse than ever. This has amplified the negative sentiment. And expectations of IT spending going back up have not played out yet.

Sounds like a lot, so why am I optimistic? Here are a few reasons to believe

1. A hard reset on markets

Once in a decade, we get a new technology wave that distorts markets. Just like the cloud wave spawned a new set of companies from 2006 onwards, AI is a big opportunity to build new enterprise software categories. It is an opportunity to rethink enterprise workflows, pricing models, and business models and displace longstanding incumbents. It sounds obvious, but this is an opportunity of a lifetime.

2. The AI learning curve

Everyone can play pickleball, but few can play tennis. The learning curve is different. AI has a steep learning curve. And this is too much innovation to absorb in too short a time. Engineers who are closest to the domain are grappling to keep up. Creative product thinkers need to imagine new workflows. Users need to learn how to use AI in their work. Buyers need to learn how to buy AI. When these realizations kick in, interest, adoption, and usage will follow.

It is well understood in consumer apps, that new generations have new behaviours, and the usual launching point for successful apps is meant for the teens/twenties. People don’t change if you put them in the enterprise, and this behaviour continues. If you ask senior sales leaders if they prefer an AI black box to forecast their month-end or a deal sheet from a pipeline review, they probably choose the latter. However, the young SDR might be embracing AI to increase their productivity exponentially. We are early in this S curve of behaviour change, and adoption will accelerate as more senior leaders & decision-makers wrap their heads around this technology.

3. Spending will go up. Eventually.

Enterprises are rediscovering the ideal division of labour between machines and humans (h/t Shyamal Hitesh Anadkat from OpenAI for writing this) as we speak, and more work will move from the domain of humans to the domain of machines. Enterprise software spend is 300B USD. Enterprise headcount spend is 3 Trillion USD. If 10% of headcount spend is redirected to software, budgets will double.

Sequoia’s recent post, AI's 600B question, predicts that based on current infra investments, 600B of revenue is expected at the application layer. It’s debatable how much of this accrues to consumer applications vs. enterprise, but no matter how you cut it, there is a large opportunity.

Coupled with the AI learning curve, software budgets will go up. These budgets will be allocated to new projects and new categories of software, and there will be opportunities to capture these budgets. For me, it’s a question of when, not if.

4. The India exit option

For venture-backed companies, India IPOs present a viable exit option. We have a roaring mid-cap market that is hungry for more technology IPOs. This scarcity means that valuations can be attractive. Founders and investors have options every step of the way. I will refrain from making more comments about this and refer to our previous post on the topic.

5. Services as a moat

When it comes to AI, people are the moat. Offering services can help you close deals, go live with confidence, and retain clients. There are many use cases - data creation, labelling, human feedback, or exception handling. When we sold customer service bots at my previous company, we offered a client a “ticket deflection team” that would look at their past data, write FAQs, train the bots and get customer service automation up by 40% in 3 months. It was part of our contract and helped close the deal. Companies like Athelas in the US are acquiring medical coding services companies in India to offer full-stack products to their clients. Expensify, in the early days, used to send hard-to-read invoices to human reviewers while maintaining a fully automated product for their end customers.

We can use India's talent advantage to offer a better quality of service, innovate with full-stack product plus service offerings, or even build talent marketplaces for hire-on-demand experts to complement software products.

6. B2B is finally cool.

When I graduated, B2C was sexy. Flipkart was scaling up. Amazon had just launched. The second wave of consumer startups like Swiggy & Urban Company had just launched. It was hard to attract A-players to work at B2B companies. Would you rather build a consumer app at Flipkart or Swiggy or build a billing system at Chargebee? In the last 5 years, this perception has shifted. People realized how hard it is to build and scale consumer startups. These companies are hard to build, operationally heavy, hard to monetize, have thin margins, need lots of capital, and usually are in winner-take-all markets with binary outcomes. You know what's cool? Deep markets, subscription revenues, high margins, and lean teams. I see a lot of smart technical leaders and product visionaries switching from consumer tech to global B2B software for the globe.

7. Talent - Moving up the maturity curve

We’ve matured from SMB to enterprise. Our first playbooks were focused on SMB. The next set of companies is wired differently and caters to enterprises - deep platform builds, longer sales cycles, and hard to build trust, but once you are in, it is harder to displace. Whatfix and MoEngage sell to F500 enterprises from India and have built a terrific sales organization. Our most successful portfolio companies are core systems of record with high ACVs, and absolute must-have systems for their clients. To complement our engineering DNA, we have a growing pool of GTM talent who can sell from India.

We’ve matured from builders to sellers. One of our friendly US investors said it well - the difference is style vs. substance. Indians are born to build, and Americans are born to sell. They can spin up a great story, build a hype brand that people aspire to work with, and hopefully, the product substance follows the style. I’ve seen this change, and we have startups that have found the style to match the substance. Canva did a rap at their user conference, but Rocketlane did it first. Postman built a mobile game to bring their vision to life (h/t Shruthi Venkatesh, and thanks for writing about it). India enterprise vendors are becoming audacious and outrageous!

We’ve built and scaled platforms. With 15 years of startups and hyperscaling behind us, we have people who have built and scaled technological platforms at a billion-user scale. Dream11 has one of the highest concurrency apps in the world - we have the population, and we have cricket as the unifying force. Hotstar had the largest concurrent livestream in the world. Kshitij Gupta wanted to give this technology to everyone and started 100ms. Outside of Facebook and Google, very few people would have worked at this scale. The past decade of consumer tech is churning out the next set of developer-focused platforms and technical entrepreneurs.

TL;DR: With the market reset, talent maturity, and structural differences, there’s no opportunity like today. It’s time to build SaaS.